Introduction
The Goods and Services Tax, broadly known as GST has been implemented by the government of India with effect from 1st July 2017. GST has brought a complete change to the tax system of India. With the idea of one nation, one tax, one market’, GST has made a great impact on the indirect taxes both at the central level and state level thereby impacting every sector of the economy including banking and financial services.
Understanding GST
In India, there are two categories of taxes; direct taxes and the indirect taxes. A direct tax like the income tax is the payment that you pay directly to the government based on the laid out rules and the rate structure. Indirect taxes are those which you pay indirectly as you pay to another person or organization that in turn pays it to the government. The GST is applicable to the indirect taxation system. We were paying multiple kinds of tax before GST for a single good or service. Excise duty is levied on the manufacture, VAT is levied each time goods change hands and value is added to the product. CST (Central Sales Tax) is charged when goods move from one state to another. This way a finished product can have excise duty, VAT, CST added to its cost before reaching its final consumer. These different taxes are now united to GST. The GST slabs are fixed at 0%, 5%, 12%, 18% and 28%.
Impact of GST on Different Loans
Every aspect of the economy has been affected by the new taxation regulations. Loans have a great impact of GST. The banking and financial sector has found itself in the slab of 18% service tax under the GST structure, as compared to its earlier 15% service tax. This clearly shows that the loans become costlier with GST. There are various loans available in the market such as personal loan, home loan, auto loan etc. We will have a discussion on individual kind of loan to understand it more clearly.
Personal Loan:- Personal loans are the most popular loan in the present market. Personal loans come with a couple of charges. Among other charges, one very significant fee is the processing fee. The processing fee of personal loan is 1%-2% of loan amount. Over the processing fee, there will be the service charges. Service charge before implementation of GST was 15%. But the services charges of a bank loan comes under 18% tax of GST. So it got increased by 3%. Let us understand the fact with an example. If your principal amount is ₹ 10,000,00. The processing fee will be ₹10,000 to ₹20,000. Service tax was expected to be ₹1,500-3000. Adding all that, the processing fee ranges from ₹11,500- ₹23,000 before GST. But now with GST coming into effect, the processing fee would jump to ₹11,800-23,600.
Similarly, the prepayment charges will also change now. Before GST was implemented, the prepayment carried a charge at 2%-5% of the outstanding loan plus service tax. So, if the outstanding loan is ₹4 lakhs, the prepayment charge would be 8,000-20,000+15% service tax. The combined total will be ₹9,200-23,000. But as GST is rolled out now, the very same amount will go up to ₹9,440-23,600. The effect of tax rise is not pinching at all.
Home Loan:- Home loan also had to undergo changes because of GST. Home Loan includes several other charges like the processing fee, advocate fees, valuation charges etc, that you have to pay to your bank or the lender. Under GST, the home loan services would now attract 18% of interest rate, which was previously 15 percent. This one-time additional charge would incur a marginal increase of 3% on your home loan. The same marginal impact will come while you are preparing a home loan as well. Here too you need to pay an 18% of tax on service charges. This is the impact of GST on ready to move in homes. But things go differently when you have opted for a home under construction. A home under construction comes under 12% of GST tax slab.
Auto Loan- The car loan is very much impacted by GST. Luxury cars like SUV become cheaper than pre GST. Hybrids have become costlier whereas electric cars are now cheaper. The implementation of GST is likely to be a boon for those wanting to bring home luxury cars whose prices are expected to go down by 2%-6% due to the reduction in the overall tax incidence by about 7%-12%. Mid sedans and mid SUVs, on the other hand, can go cheaper by 2%-5%. Small car prices may go up by 1%-2%. While coming at car loans there will be a processing fee of 1%-2% on the principal amount and again a pre-closer fee of 2% to 6% on the outstanding amount. After calculating all the aspects there will be a service tax of 15% on the processing fee. After implementation of GST, the processing fee has been revised from 15% to 18%.
So these are the main impacts of GST of the three most popular kind of loans. No one can deny the impact on the loans but it is also the truth that the impact just a marginal one.